[Fundamental viewpoint]
Last week, U.S. stock indices rose on expectations of renewed negotiations aimed at ending hostilities between the U.S. and Iran.
Weekly percentage change: Dow Jones: +3.19%, NASDAQ: +6.84%, S&P 500: +4.54%.
On the other hand, medium- to long-term
risks include concerns over military conflict in the Middle East and the
prolonged Ukraine conflict, financial instability and worries about a global
economic slowdown stemming from the U.S. administration's tariff policies and
rising interest rates, as well as fears of a real estate bubble bursting and
China's economic slowdown. Consequently, there are also concerns about the
arrival of stagflation. Furthermore, continued attention is required regarding
geopolitical risks in Latin America and East Asia.
The difference in the yield spread between the Japanese and U.S. markets is 0.59 points undervalued for the Japanese market when the OECD's nominal GDP forecast for 2026 is taken into account. The reason for the undervaluation is the difference between the S&P 500's P/E ratio of 21.6 and the Nikkei 225's P/E ratio of 20.5 the difference between the U.S. and Japanese interest rates, and the difference in GDP growth rates.
In order for the U.S. and Japanese markets to be in equilibrium, the following conditions must be met.
The difference in GDP growth between Japan and the U.S. in 2026 relative to the current price of the Nikkei 225 will be 0.59 prcentage points larger than the OECD forecast. (Japan is revised downward or the U.S. is revised upward). Or the current year's forecast PER for stocks in the Nikkei Stock Average becomes about 23.4 Or, the Nikkei 225 will be around 66,510 yen.
As a result, the Japanese market is undervalued by about 66,510 yen in the medium to long term.
From a fundamental perspective, one could say that the Japanese market is about 8,030 yen less attractive than the U.S. market. Last week, the weakness in the Japanese market intensified.
[Conditions for Nikkei average rise]
In the future, the following assumptions are necessary for the Nikkei average to rise further.
① Rising US market
② Increase in profit forecast for the current fiscal year above the previous year's level
③ Further depreciation of the yen due to the widening interest rate gap between Japan and the U.S.
④ Upward revision of Japan's 2026 GDP estimate (now +2.5%) by OECD
⑤ Foreign investors over-buying
Looking at recent movements
① The weekly leg of the NYDow was positive last week. The daily is above the 200-day line and the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was positive. The daily is a above the 200-day line and the clouds on the Ichimoku Chart. This week, the focus will be on whether the NYDow can keep above the 200-day line.
② Following the release of earnings results, the projected ROE for Nikkei 225 constituent stocks stood at +8.9%. This represents a decline of 0.1 percentage points compared to three months ago. The projected profit growth rate was -1.7%, an improvement of 1.3 percentage points compared to three months ago.
③ Long-term U.S. interest rates fell, narrowing the interest rate differential between Japan and the U.S. from 1.90 to 1.85, and the dollar-yen exchange rate moved toward a stronger yen, fluctuating between the 159 and 157 yen ranges. The Dollar Index fell by 0.48% over the week.
④ The OECD's nominal GDP growth rate for Japan and the U.S. in 2026 is expected to be +3.2% for Japan and +4.7% for the U.S., so the Japanese market is 1.7 percentage points inferior in this aspect.
⑤ Net buying was recorded in the second week of April, and it is highly likely that net buying also occurred in the third week of April; net buying is expected this week. Last week, out of the five factors, factor ① was a bullish indicator.
[Technical viewpoint]
From a technical perspective, the Japanese market is overvalued by 11.3 percentage points (equivalent to approximately ¥6,610 for the Nikkei 225) relative to the NASDAQ's 200-day moving average deviation rate on a medium-to-long-term basis. Meanwhile, it is overvalued by 14.6 percentage points (equivalent to approximately ¥8,540 for the Nikkei 225) relative to the NY Dow's 200-day moving average deviation rate on a medium-to-long-term basis.
The Japanese market is performing better than the Dow Jones and NASDAQ. The VIX, an indicator of volatility in the U.S. market, fell to 17.5 for the week. The Nikkei VI fell to 28.4 for the week. The U.S. market is in an “optimistic” state, while the Japanese market is in a “fearful” state.
The Nikkei Average is above the 9-day and 25-day moving averages. A “green light” is lit for the short-term trend.
The Nikkei Average is above the cloud in the Ichimoku Kinko Hyo chart. The overall deviation rate is +34.3%, and the deviation rate from the 200-day moving average is +19.7%. With three factors positive, a “green light” is lit for the medium-term trend.
In the US market, the NY Dow is above the 9-day line and 25-day and 200-day lines. It is above the clouds of the Ichimoku chart.
The NASDAQ is the above 9-day line and 25-day and 200-day lines. It is above the clouds the Ichimoku Chart.
It is a ‘green light’ in the short term and a ‘green light’ in the medium term.
[Outlook for this week]
In the U.S. market, concerns about an economic downturn driven by the prolonged conflict in the Middle East and high oil prices are likely to be the primary focus for the time being.
Looking at the technical aspects, the U.S. market is in a medium-term up trend and a short-term up trend. The Japanese market is in a medium-term up trend, and the short-term is up trend.
Analysis of the foreign exchange market indicates that the yen has shifted towards depreciation, with the low of 139 yen reached in April 2025 marking the bottom. This week, the yen is expected to trade between the 159 and 156 yen per dollar range.
In the U.S. markets this week, the possibility of a resolution to the conflict between Iran and the U.S. will continue to influence market movements. Additionally, earnings reports are scheduled from companies such as Tesla, Intel, UnitedHealth, American Express, and P&G. On the economic front, retail sales and the S&P PMI will also be in the spotlight. Globally, PMI and business sentiment indices from various European countries will be released, along with UK inflation and retail sales figures, the People’s Bank of China’s interest rate decision, and Japan’s trade statistics and inflation rate.
Last week, the Nikkei 225 closed above the expected range. The high was 1,090 yen above the upper limit, and the low was 2,410 yen above the lower limit.
This week, the Nikkei 225 is expected to trade within a range defined by the upper limit at the +2σ Bollinger Band (currently around 59,060 yen) and the lower limit at the +1σ Bollinger Band (currently 56,790 yen).
This week, the Nikkei Average is likely to continue being swayed by the outcome of the conflict between Iran and the U.S. and by crude oil prices. However, if the ceasefire between the U.S. and Iran holds, the index is expected to move within the range between the +2σ and +1σ lines of the Bollinger Bands.
